Schnitzer Steel Earnings Preview: Time to Move On From the Steel Industry

NEW YORK (TheStreet) -- Schnitzer Steel (SCHN), one of the largest steel producers in the U.S., will report third-quarter fiscal 2015 earnings results Tuesday before the opening bell.

The metals and mining industry was one of the worst-performing groups in the entire market in 2014, losing more than 14%, according to Fidelity. There were hopes of a "Cinderella rebound" in 2015. This hasn't happened. And it doesn't appear as if even the better-run steel manufacturers can avoid suffering in a commodity industry with poor economics.

Investors would be better served taking what profit or loss they have incurred and moving on to better investment prospects.

Schnitzer, headquartered in Portland, Ore., has been one of the steel companies hardest hurt by slumping iron ore prices. Iron ore is the main ingredient for making steel. Shares of Schnitzer Steel have already plummeted more than 15% so far in 2015.

And considering Schnitzer stock has lost 32% and 56% in the past three years and five years, respectively, it's reasonable to ask what's going to change this year. Just as important, what's going to change next year?

There are no signs that the prospects for this industry are going to get better, especially with the group has already lost some 9% of its value in 2015.

Schnitzer must move mountains Tuesday to keep its stocks from sinking further. And that's a tall order. In order to keep its business running and pay its debts, Schnitzer need higher steel prices to help it generate higher profits. It's been three years with no signs of improvement.

Weak prices in the oil industry have caused panic among energy companies, and steel companies will suffer the same fate. Except in this case, Schnitzer's business will be hurt more. That's because Schnitzer's net debt position is over $300 million, while it generates just $111 million in operating cash flow. This leaves little margin for error.

On Tuesday, the company must show that its business is more stable than its metrics suggest. Not only must Schnitzer deliver on expectations, the company must also give investors a sense of confidence with its guidance. That's not likely to happen when steel prices are trending lower.

For the quarter that ended in May, the average analyst estimates call for Schnitzer to deliver a third-quarter loss of 14 cents per share, reversing last year's 16-cent-per-share profit. Revenue, meanwhile, is projected to be $503.7 million, a year-over-year decline of 21%. For the full year ending in August, analysts expect a loss of 34 cents per share, reversing last year's profit of 44 cents, while full-year revenue of $2 billion marks a 21% year-over-year decline.

In fairness, management has done what it can to make the best out of a bad situation. Plans to reduce expenses, lower capacity and improve productivity are encouraging. From these initiatives, the company estimates its can improve its financial performance by some $60 million annually.

But these moves aren't new. Competitors have tried them and they've done nothing but prolong investor agony. Pain and suffering have been the only predictable aspects of steel stocks, and will likely remain so in the foreseeable future.

This article is commentary by an independent contributor. At the time of publication, the author held no shares in any of the stocks mentioned.

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